QBE eyes expansion as profit doubles

QBE Insurance yesterday admitted the post-September 11 surge in insurance premium prices was finally petering out and it planned to maintain growth momentum through a series of acquisitions.

QBE shares surged 46c to $9.89 after the company reported a 110 per cent rise in net profit and a rise in the interim dividend from 16.5c to 20c, franked to 50 per cent.

Investors were spurred by chief executive Frank O'Halloran's prediction that insurance margins for the full year would exceed its 8.5 per cent target and could rise as high as 9 per cent in 2004, even though QBE is putting money aside for unexpected claims.

While these forecasts were not as strong as the insurance margin predictions by domestic rivals, Insurance Australia Group (IAG) and Suncorp-Metway, it was evidence that QBE continued to benefit from a benign claims environment while reinsurance and other costs also have been reduced.

Mr O'Halloran painted a sombre outlook for premium growth, which has slowed due to the impact of the rising Australian dollar on QBE's offshore premium income.

QBE expects premium rate rises across its portfolio of 10 per cent for the balance of the year and premium income growth of 10 to 13 per cent. But in 2004, average premium rates are expected to rise only 5 per cent, as classes such as property, aviation and energy fall in price and liability classes continue to rise.

Mr O'Halloran said QBE had a preference for growth by acquisition because it wanted to avoid organic growth in a market of falling premiums. This was a feature of insurance failures, including HIH.

"The onus is on management to be conservative and be more conservative in the cycle we are currently going through," he said.

QBE is running its balance sheet more conservatively by boosting prudential margins by about $400 million. But investors hope some of this money won't be needed and will instead be released back into profits.

Mr O'Halloran said catastrophes would occur at some point, but it was QBE's philosophy to put money aside for "a rainy day".

He cited tornadoes in the US as the largest single event during the year, but said it was immaterial in the context of the company's income.

QBE also had almost no exposure to claims from last week's blackouts in the US because policy terms mostly required the holder to absorb the first two weeks of losses.

Mr O'Halloran said QBE was looking at a number of smaller and larger acquisitions in Central America, central and eastern Europe and the Asia-Pacific regions and it could raise equity capital to fund purchases.

Surprisingly, QBE has decided to introduce a 0.5 per cent coupon to the holders of its 20-year hybrid equity instruments called LYONs, but denied this was to discourage them from converting the securities to ordinary shares, which could dilute ordinary share holdings substantially.

Mr O'Halloran said the global reinsurance market appeared to have stabilised thanks to the rise in sharemarkets and capital raisings.

One indicator of the strength of the international insurance market, he said, was a substantial increase in the underwriting capacity of the Lloyd's of London market, of which QBE is the second-biggest underwriter.